Idiosyncratic risk and the manager

Brent Glover and Oliver Levine

Journal of Financial Economics, 2017, vol. 126, issue 2, 320-341

Abstract: We develop a model to characterize and quantify the effects of stock, option, and fixed compensation on a manager’s risk-taking incentive and investment choice. We find the average chief executive officer’s (CEO) compensation contract incentivizes overinvestment by 1.3 percentage points per year, with significant variation across firms and over time. We estimate a value of CEO effort implied by compensation contracts and find it to be strongly related to firm intangibility. Finally, we assess the effects on investment of FAS 123R and a hypothetical ban on option grants and find heterogeneous responses that depend on firm volatility and the prior structure of compensation.

Keywords: Corporate investment; Executive compensation; Managerial incentives; Agency conflicts; Risk taking (search for similar items in EconPapers)
JEL-codes: G31 G32 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X17301502
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:126:y:2017:i:2:p:320-341

DOI: 10.1016/j.jfineco.2017.07.003

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().